Politics & Policy

Gates, Buffett, and Misguided Philanthropy

Billionaires who really want to help humanity should stay in business.

Two weeks ago dozens of billionaires and a few merely super-wealthy individuals gathered in Tucson, Ariz., to discuss the future. The Trilateral Commission and the Bilderbergers having failed to adequately decide the world’s fate, one might well imagine that these persons, holding a significant portion of the world’s cash, were secretly meeting to set the planet right.

It was nothing of the sort. Rather, the topic of the day was how they could best give away their fortunes. Each of the participants had accepted Bill Gates’s and Warren Buffett’s challenge to donate at least half their net wealth to charity. To date, 61 persons have taken up the challenge, and their good intentions are truly worthy of praise. One hopes that most of them are doing so out of a desire to help others and not because of some residual guilt over their good fortune.

Nothing grates on me more than hearing that Bill Gates or some other successful person needs to “give back” to society. I would say that building a company that employs tens of thousands and creates products that underpin millions more jobs around the world qualifies as one heck of a contribution to society. Having made billions doing so, Mr. Gates is perfectly within his rights to spend it any way he wishes. Still, we should recognize that the billionaire who opts to place his money into a venture-capital firm that may finance the Microsofts of tomorrow is making a contribution to human well-being at least as large as that of the billionaire who gives his money to charity. And if he makes more billions in the process, more power to him. He now has even more money to give away or, if he chooses, to invest in creating new businesses.

Until someone sends me a canceled paycheck he received from a poor man, I will go on believing that capitalists, who are building businesses that provide most of us with a standard of living unimaginable in any previous era, walk with the angels. I have nothing but praise for the Peace Corps volunteers who bring clean drinking water and possibly a bit of locally generated electricity to a poor village. At the same time I recognize that such a contribution pales in comparison to what a capitalist who invests in and profits from building a power plant, providing water and power to a million persons, contributes to the greater good of humanity.

Still, as so many billionaires are already committed to giving away sizable portions of their wealth, I have some concerns and thoughts to share with them. First, beware the “dead hand of the church.” In the Middle Ages and beyond, numerous rich persons donated large portions of their lands and other wealth to the church in hopes of gaining a glorious afterlife. Whatever their rewards were after death, back on earth the concentration of so much wealth in the hands of the church was a prime cause of prolonged economic stagnation.

The church paid no taxes, so that its wealth was not available for state purposes. Worse, the church’s general indifference to economic considerations locked up huge amounts of capital that could otherwise have moved society forward at a much greater pace. Similar considerations hold for foundations today. Like churches, they do not pay taxes, and they do not have the same incentives as private holders of capital. Foundations are not risk takers. The impulse of any foundation’s board is to park its endowment in the safest investments available.

Unfortunately for society, this is often the worst use of excess capital. No great or even small business is built unless someone decides to risk some portion of his capital building it. Risk-averse foundations will only rarely invest their endowments in ways that drive general economic growth. As a result, locking up hundreds of billions of dollars in the “dead hand of the foundations” retards economic growth and keeps millions of people significantly poorer than they otherwise would be. All of society would benefit if foundations had a drop-dead date by which their entire endowment had to be spent.

Assuming the rich still want to give away most of their fortunes, what options do they have? Well, the most practical option is to spend it all as quickly as possible (although keeping in mind that overspending in any one area often leads to waste). Why spend it quickly? Mainly because that is the best way to ensure that the money is spent on projects you deem important. Also, money has a time value. No self-made billionaire would ever opt to receive $100 million a year for ten years rather than $1 billion immediately. Persons who have made fortunes know that if they invest a billion immediately, the pot at the end of a decade will be much larger than if they had had to invest it in dribs and drabs over ten years. Similarly, by applying a typical discount rate, the “net present value” of a billion-dollar foundation, giving away 5 percent of its endowment annually, is cut in half.

Moreover, the world has plenty of problems and crises right now. If AIDS in Africa is at pandemic proportions, what sense does it make for a $30 billion foundation to combat this crisis a few hundred million at a time? New research shows that an anti-viral drug cocktail dramatically reduces transmission rates. That means the time to win this battle is now. If the entire $30 billion is spent in one great effort, the tide can be possibly be turned and victory declared in 2012. If such a dramatic outcome is possible, why opt to glory in small improvements spread out over decades?

Similarly, if your foundation builds charter schools, why use only 5 percent of the endowment a year to build ten schools? Build a thousand right now, leave them enough cash to sustain operations for a decade, and let’s find out what difference they make. In the years immediately after World War I, Julius Rosenwald, the man who made Sears Roebuck great, used much of his fortune to build 5,400 schools for black children in the South. By some estimates, 60 percent of American blacks who completed primary-level education in that period attended a school built by Mr. Rosenwald. As he said, “Permanent endowments tend to lessen the amount available for immediate needs, and our immediate needs are too plain and too urgent to allow us to do the work of future generations.”

Today, there is over $500 billion available in various foundations. Development economist Jeffrey Sachs believes that a $250 billion “big push” in Africa would propel that continent onto a permanently high growth trajectory that would greatly improve the lives of billions yet unborn. If he is right, then the foundations have it in their power to immediately save a huge segment of humanity from poverty and disease.

Too much to risk? Well, according to the U.N., $10 billion is all that is required to reverse the AIDS epidemic. That would take a mere 2 percent increase in endowment distributions. Where is the morality in letting millions suffer today, in the hopes of helping a few others in some distant future? Is it not more moral to increase the prosperity of the current generation so that in the future fewer will need help — and those who do will find that there are many more persons who can afford to help them?

Still, few today remember Julius Rosenwald, as there is no foundation keeping his memory alive. Many rich donors are fond of the idea of creating a foundation that will carry their name into the next century and beyond. There is absolutely no blame in this. If I had a billion dollars to dispose of, I would be sorely tempted to do the same. I like the idea of my great-grandchildren knowing I was still acting from beyond the grave to help improve the world.

I have one great caution, however, for those who want a foundation to perpetuate their name for posterity: Ensure that the bylaws of your foundation are locked in legal unbreakable steel that forces future boards to spend your money as you intended. It is very doubtful that William Randolph Hearst, J. P. Morgan, John D. MacArthur, Andrew Carnegie, Richard Mellon, Henry Ford, John D. Rockefeller, or W. K. Kellogg would approve of much of what the foundations they created are doing. Captured by the Left, none of them have ever met a socialist cause they did not love. It is truly ironic that these foundations give so much of their endowments away to organizations that are overtly hostile to the capitalist system that built the fortunes they exist on.

As a final note, anyone who is looking to donate a few million toward promoting capitalism, and wants to place it where it will have a large impact, please get in contact with me.

— Jim Lacey is professor of strategic studies at the Marine War College. He is also the author of The First Clash and Keep from All Thoughtful Men. The opinions presented here are entirely his own and do not represent those of the Department of Defense or any of its members.


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